Clouds on buy-to-let horizon

Is there no end to the buy-to-let boom? Maybe there is. Rising house prices, low interest rates and a pedestrian stock market have made buy-to-let the investment phenomenon of the past two years. But rising interest rates expected this summer could prick the bubble of people buying a second property, financing it from rents and aiming to sell it for a profit.

Financing your old age by buying an extra property, which you can let out while still working, has in recent months looked like a guarantee against the vagaries of pension-fund managers and employers.

Britain's buy-to-let property market is now worth about £80bn as record numbers of amateur landlords have climbed on the housing ladder. According to the Council of Mortgage Lenders, almost 69,000 new buy-to-let loans were granted last year.

Even MPs are at it. One survey claims that more than 100 MPs now supplement their salaries by owning a house or flat that they let.

There are now more than 40 banks, building societies and other financial organisations offering buy-to-let money.Typically, landlords have been able to borrow up to 85% of the value of a property at interest rates of less than 2% over base rate. A new survey by the Association of Residential Letting Agents (ARLA) suggests that the average value of buy-to-let property is up by 9.5% in the six months since November 2001. In the south-east, average capital values have risen by 11.5%, from £166,200 to £183,300. In the rest of the UK, the average increase is 2.7%, from £96,700 to £99,300.

Will the boom continue? Make up your own mind

YES: Most economists are expecting interest rates to rise soon. Small increases could prove costly to many buyers. A 1% rise will add about 12% to the repayment costs of a variable-rate loan.

YES: In the current economic climate, landlords cannot rely on double-digit inflation to erode the real value of their mortgage over its term. To make buy-to-let worthwhile, you need enough rental income to cover mortgage debt, periods without tenants, agent's fees and service charges.

YES: Simple economics dictate that as the supply of properties for rent increases, the level of rents will fall. An ARLA survey suggests the average rental return in the south-east has dropped to 6.5%, although returns have remained unchanged in the rest of the UK, at 7.4%.

YES: London has a glut of two-bedroom flats for rent. Buy-to-let is concentrated in London and the south-east.

YES: The latest Royal Institution of Chartered Surveyors lettings survey reveals a collapse in demand from corporate tenants in the wake of September 11, coinciding with the largest ever rise in the number of available flats.

YES: Many investors have borrowed heavily and could face negative cash flow, with landlords unable to cover their expenses from rent.

YES: If mortgage rates, now around 5%, were to rise above property yields, many investors could be left in an untenable position: the income from their investment would no longer service the debt secured against it. Many could be forced to sell their properties, with inevitable consequences for prices.

NO: Demand for rental property is likely to grow. The property agent FPD Savills expects 4m new households to be created in the next 20 years, and more than a quarter of these are expected to rent.

NO: The supply of new homes is likely to remain restricted, buoying rents.

NO: UCB Home Loans says the action is moving northwards, where there are just as many positive reasons to buy-to-let if property prices outrun salary increases.

NO: Buy-to-let properties represent only 10% of the total private rented sector which, in turn, forms just 10% of the total housing market.

NO: As long as investors treat it as a long-term business rather than a way to make a quick buck, buy-to-let remains a sound investment.